Making the Most of the Saver’s Credit

As tax filing season winds down, let’s take a look at a tax credit that can help you plan during the year ahead. Those just starting out in the workforce or those approaching retirement may want to take a closer look at the Saver’s Credit, which provides incentive for low and moderate-income earners to save for retirement. It is essentially free money from the IRS that can reduce your tax debt.

Unlike a tax deduction, which reduces taxable income, the Saver’s Credit and other tax credits are dollar-for-dollar reductions against total taxes owed for the year. Individuals whose income is below certain thresholds (see below) can claim a maximum of 50 percent of contributions to their workplace retirement savings plans or individually owned retirement accounts (up to $2,000 for individuals and $4,000 for married filing jointly). Thus, singles can receive a maximum credit of $1,000 ($2,000 for married couples filing jointly). The following is a list of additional features and limitations of the Saver’s Credit:

Eligible contributions may be reduced by recent distributions received from a retirement plan or IRA;

You must be age 18 or older, not a full-time student, and cannot be claimed as a dependent on someone else’s return in order to claim, and;

The credit is nonrefundable, which means that if the credit exceeds the amount of taxes owed, the excess is lost.

As outlined by the IRS in the table below, an individual’s or couple’s adjusted gross income (AGI) determines the percentage of their contribution that may be eligible for the Saver’s Credit. As AGI increases, the percentage of what one qualifies for is reduced – and, in some cases, eliminated entirely.

2019 Saver’s Credit

Credit Rate

Married Filing Jointly

Head of Household

Single, married filing separately, or qualifying widow(er)

50% of your contribution

AGI not more than $38,500

AGI not more than $28,875

AGI not more than $19,250

20% of your contribution

$38,501 – $41,500

$28,876 – $31,125

$19,251 – $20,750

10% of your contribution

$41,501 – $64,000

$31,126 – $48,000

$20,751 – $32,000

0% of your contribution

more than $64,000

more than $48,000

more than $32,000

The following are examples of who may benefit from the Saver’s Credit:

Take a new college graduate who lands her first job on October 1, 2019, at a salary of $60,000. For the three months from October through December, she earns $15,000. She contributes $2,000 in pre-tax dollars to the company 401(k), reducing her 2019 gross income by that amount. She would be eligible for a $1,000 credit against her tax liability for 2019.

Finally, consider a 60-year-old single filer who plans to retire on June 30, 2019. His salary on an annualized basis is $86,000, so his earnings for the months of January through June would equal $43,000. He contributes to the workplace plan the maximum allowable amount of $19,000 plus the catch-up contribution of $6,000 for a taxpayer age 50 or older, reducing his gross income to $18,000. He would be eligible for a Saver’s Credit of 50% of $2,000, for a total of $1,000.

These are just a few of the situations in which the Saver’s Credit can be used effectively. Contact your financial strategist to learn if you might be eligible for the Saver’s Credit.